Government to Convert Part of Retirement Fund Into MF-Units

According to a report by the Economic Times, EPFO will soon start paying part of the retirement fund to pensioners in the form of MF Units . At present during the time of exit, a pensioner gets a consolidated fund along with an interest rate decided by the EPFO’s Central Board of Trustees. The current Interest Rate on PF account is 8.65%

What does it means?

According to the new policy which is under discussion, the pensioner will be paid 85 % of the total amount with the interest rate decided by the EPFO. Return on the rest of the 15 % of the total amount will be decided on the basis Mutual Fund model. The interest rate on this particular 15 % will be paid by multiplying the units accumulated with the value of equity on the day of exit. Subscribers may defer encashment by 1 or 2 years depending on future returns and the tenure finalised by CBT.

Benefits of the new methods of Payments

EPFO started investing in equities since 2015 with only 5 % of the corpus. Since then it has been increasing its investment. The total investment by pensioners in the financial year of 2016 was Rs 6577 crores which increased to Rs 14982 crore in the financial year of 2017. Some of the predictable benefits, if the above-proposed decision is adopted are:

As stated above the return on 15% of the retirement corpus will be higher than the regular EPF Interest Rate. Looking at current market conditions the rate of return on equity is around 15%, which is higher than EPF Interest rate of 8.65%

It will give many investment options and help in creating new structures that will help in lifting the allocations of investment on equities.

This will also mean that pensioners can delay their encashment at the time of exit. The subscribers can defer their withdrawals by up to 2 years, if they deem that it will ensure them higher returns.

While the proposed policy has many benefits, the opposition has already arisen from trade unions and labor unions. According to them, this policy will not be beneficial as the rate of interest based on the MF model is not fixed and may yield less return or no return at all.